Originally published by AxiTrader
Welcome to the Forex Today column.
In it, I'll be trying to add a bit more colour and a lot more charts than I do in my broader overnight market Wrap I do first thing every morning to set myself and my trading up for each day and each week.
RECAP
Volatility begets volatility. Mandlebrot taught us that and currency markets have certainly experienced that over the past couple of days. After igniting a rally the previous night Mario Draghi sent his minions out to unwind it. That hit euro but the buyers came back swiftly.
Likewise, comments from Market Carney at the BoE and deputy governor Patterson of the BoC saw sterling and the Canadian dollar roaring. The Aussie and kiwi are well bid as well in what is another night of US dollar weakness. USD/JPY is calm.
But the question I'm asking myself is whether this is peak pessimism for the US dollar as traders focus on the idea that other central banks will raise rates while the Fed is actually doing it.
HERE'S A DEEPER DIVE - IN A LITTLE MORE DETAIL AND WITH A FEW CHARTS
On Central Bankers:
Central bankers are supposed to go quietly amid the noise doing their thing to keep the economy on as even a keel as possible and leaving markets to adjust to and reflect that economic reality.
But over the years as the "Greenspan Put" morphed into a global move by central bankers to rescue the economy in the wake of the GFC with emergency stimulus its the limelight, not the shadows that central bankers seek.
They'll say they did it by necessity. Someone had to while governments dilly dallied. But who doesn't love the limelight, the ability to move markets like the creator?
So now we have central bankers saying things and moving markets.
But they aren't always happy with the impact as Ben Bernanke's taper tantrum showed. Mario Draghi seems to be lamenting this week's speech already and my guess would be Mark Carney probably feels a similar remorse after sterling ripped back toward 1.30.
Central bankers probably wish they could get back into the shadows. But for now, they remain front and center. And traders are hanging off their every word.
Now for the day ahead:
Mark Carney did a bit of an ordinary back flip overnight compared to what he said just a week or so ago. Rather than reiterate his “now is not the time” to raise rates comments Carney followed up his pseudo tightening – the lift in bank capital requirements the previous day – by saying the Bank of England will be having the debate about when rates will be increased – “in coming months”. Readers of this note won’t be surprised by that.
So as a result GBP/USD is at 1.2937 at present with a gain of around one per cent. The high overnight was around the levels of the June highs before the pullback in GBP and this will be a level traders are now looking at. A break and we’ll see GBP back testing very important resistance at 1.3050/60 where many levels over multiple time frames converge.
Euro dipped after the “sources” story broke that Mario Draghi reckoned traders had got the tiger by the tail and misinterpreted his speech the previous day.
As I noted in my Morning Markets Wrap earlier, Reuters reported sourced told then Draghi was trying to signal tolerance for this period while inflation dips – he did highlight central banks could look past it – rather than signal an imminent tightening in policy. If that was the case he did a poor communication job - or at least doesn't understand markets.
The sources, and ECB vice-president Constancio overnight highlight the EU economy continues to need accommodative policy. Draghi did say that in his speech as I highlighted yesterday. But it was equally very upbeat. It was a cracking speech. Yet Reuters reports sources told them "the market failed to take note of the caveats in Draghi's speech”.
The result was a wild night for euro traders with a range of 1.1290ish to 1.1390ish. But at 1.1379 it’s still up 0.4% on the day. There is important overhead resistance which combined with the ECB pirouette could provide a cap on gains going forward.
The level to watch is 1.1430/50.
Here's the chart:
Elsewhere the Canadian dollar is having a cracker after comments from deputy governor Patterson. She told an audience in Calgary that the drag from lower oil prices on the economy has run its course and rate cuts have done their work.
“Two years later, it is our view that these cuts have helped facilitate the economy's adjustment to the oil price shock and that the economic drag from lower prices is largely behind us,” she said.
And voila, we have a huge rally in the CAD which has forced USD/CAD down toward 1.30. It’s at 1.3038 down around 1.3% this morning.
That's now the full round trip from the start of the up move and satisfaction of the target I highlighted last week if I got stopped out of my long - which I did. The question is now what's next. If we are peak US dollar pessimism as I think we might be then around/below 1.29 may look like good levels for USD/CAD to be picked up.
While above 1.2940/60 that would remain my view.
Here's the latest daily chart:
The yen is largely unchanged at 112.26, the kiwi is back above 73 cents at 0.7309 up 0.55% and the Aussie is roaring.
At 0.7640 the Aussie is on the cusp of a great leap technically. This level was the Fibonacci projection from the original rally which stalled below 0.7515/20. If the Aussie can hold above here then the next technical projection comes in at 0.7740. That sound ridiculous in many ways. But when you have a recovery in iron ore, base metals, and risk appetite (stocks rally) then the preconditions are there for a higher Aussie. Throw in this potential technical break and a weaker US dollar and who knows. The Aussie might just surprise everyone and catch up with the majors.
I've done my usual full AUD/USD piece earlier this morning - in particular, I've focussed on the discussion about RBA interest rates ignited by former board member John Edwards.
Now back to the US dollar
It's too early to say the bottom is in for the US dollar. But if interest rates and central bank policy matters than the message the Fed has sent this week about the continued push toward rate hikes matters.
Mario Draghi tried to clarify last night, Mark Carney said a conversation will take place but UK data is going to be key. And while the BoC is giving the clearest signal of higher rates it's likely to do it gradually.
All that said though it remains the case that while the US dataflow remains awful - and it truly is awful relative to expectations at the moment - it is going to be difficult for the dollar to sustainably rally.
That makes the data flow in the first two weeks of the July crucial for forex traders. But it's also worth noting the US 2-10 curve has steepened 9 points in the past 2 days.
Change is afoot.
Have a great day's trading.